Small Firms Increased Costs

Government Policy Costing Small Firms a Fortune

The current Government has made much of being ‘a Government for small business’ by making efforts to reduce red tape for SMEs. They’ve also shown willingness to tackle the issue of late payment more forcibly—even before the Carillion collapse.

But how much are their policies costing the average small business?

Quite a lot, a recent analysis suggests.

Cost of government policy up £60,000 in six years

According to the latest Impact of Government Policy Index (IGPI), the UK small business community is collectively spending 15% more on a swathe of taxes, levies and employment obligations compared to 2011.

The Index, compiled by the Centre for Economics and Business Research (Cebr) for the Federation of Small Businesses (FSB), analyses a range of policy-linked obligations, including business rates, auto-enrolment, Insurance Premium Tax, Corporation Tax, business rates, employer National Insurance Contributions, the apprenticeship levy, minimum wage rates, vehicle excise duty and the climate change levy.

It shows the average VAT-registered UK small business collectively spending over £480,000 each year on these interventions, up from £420,000 six years ago.

The Index also reveals that Labour-intensive industries are hit particularly hard by government interventions, with smaller businesses in the construction sector suffering a 28% increase in policy-linked costs—13 percentage points higher than the IGPI reading for small UK firms as a whole.

The policies costing small firms dearly

Some of the major costs companies now face include:

  • Higher employment costs
    Employment costs have soared since 2011, with the minimum hourly pay for staff over 25 rising 29% in that time. The rate is set to increase by a further 5% in April and 2016 forecasts predicted that a full-time NMW worker would earn over £4,400 per annum more by 2020.
  • National insurance contributions of more than £1,000 a year for qualifying employees
  • Contributions to their qualifying employees’ auto-enrolment pension schemes. Currently at 2%, employer contributions will rise to 3% in April 2019.

On top of this, previous FSB research shows that on average, a small company loses £5,000 and three working weeks a year to tax administration and paperwork alone.

“Come the beginning of April, small firms will not only have Brexit day to worry about but also Making Tax Digital, a higher living wage, rising employer auto-enrolment contributions and further business rates hikes,” said (FSB) National Chairman Mike Cherry.

This will be a flashpoint for a lot of businesses, one which could threaten the futures of many.”

He warned that small firms are set to see costs spiral as the result of government policies in the months ahead and with Brexit on the horizon, wants to see the Government doing more to help small businesses.

“Mitigating spiralling employment costs through further enhancement of the Employment Allowance and reforming outdated aspects of the tax regime, particularly business rates, would be a good place to start,” he added.

Failure to thrive in the international market

The Index was released just as it was announced that the UK had fallen from 4th to 9th in World Bank’s Ease of Doing Business index and to 34th in World Economic Forum’s Burden of Government Regulation rankings.

“The competition to attract entrepreneurs to the UK is more intense than ever,” warned Mike Cherry, who believes the cost of staff is a significant burden on UK small businesses as they begin to grow, hindering their progress.

“Government officials scratch their heads over why small UK firms don’t expand at the same pace and frequency of small businesses elsewhere.

“Clearly, the burden placed on business owners as they grow their workforces needs to be looked at.”

Want to know more? You can read the IGPI 2019 here.

What do you think of government policy? Do you think it’s costing small businesses more than they gain? Let us know your thoughts below.

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